114 financial institutions in 16 European countries on review as well

MADRID (MarketWatch) — Moody’s Investors Service triggered fresh worries for investors after placing 17 major global financial firms review for potential downgrades due to the euro-zone crisis and other issues, as well as putting more than 100 European financial institutions on review.

The global capital markets “are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” Moody’s said in a statement late Wednesday.

“These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness, and opacity of risk, have diminished the longer term profitability and growth prospects of these firms,” the ratings firm said.

European banks hemorrhage profits

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European banks have had an atrocious reporting period. The latest is Société Générale with a 51% drop in net profit. This came after similar bad news from BNP Paribas on Wednesday. WSJ's David Enrich has been following the numbers. Photo: AP

Meanwhile, Moody’s also put 114 financial institutions in 16 European countries on review for possible downgrade due to the euro-zone crisis and “the deteriorating creditworthiness of euro area sovereigns.” Several of those were included in the list of 17 firms with global reach.

Warnings for many of the European financial institutions were follow-up moves after the ratings firm downgraded the debt ratings of Italy, Portugal, Slovakia, Slovenia and Malta by one notch and slashed Spain’s sovereign rating by two notches on Feb. 13. It also placed France, the United Kingdom and Austria on a negative ratings watch. See report on Moody’s ratings move.

“While there are mitigating factors such as the currently supportive stance of many governments towards their banking systems and accommodative monetary policies, these are overshadowed by the aforementioned pressures, in Moody’s opinion,” the ratings firm said.

Those pressures includes the long-term and adverse impact of the euro-zone crisis, which makes the environment difficult for European banks, the deteriorating creditworthiness of euro-area sovereigns, and “substantial challenges” faced by banks and securities firms with significant capital market activities, it said.

The Moody’s announcement on European financial institutions didn’t come as a complete surprise. On Jan. 18, it warned that a number of European banks were likely to be placed on review for downgrade in the first quarter of 2012.

Michael Symonds, credit analyst, financials, at Daiwa Capital Markets Europe, said in a note to investors that while downgrades from ratings firms seem to be an everyday occurrence, the Moody’s announcements need to be considered for the potential of setting new ratings floors for institutions.

“For example, in the case of the potential ratings actions at Moody’s, resulting downgrades may simply bring Moody’s rating in line with the equivalent at S&P and Fitch, where in many circumstances these agencies may have acted ahead of Moody’s in downgrading banks,” said Symonds.

“We have quickly reviewed current equivalent ratings across Moody’s, S&P, and Fitch, as well as the maximum potential downgrade at Moody’s, and highlight Bank of America, Nomura, RBS, BNP, Citibank, Deutsche Bank, UBS and Morgan Stanley as banks where new ratings floors may be established as a result of Moody’s actions,” he said.

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